How to Deal with Property Tax Adjustments

It’s not unusual for Purchasers to get settled in their new home and get a Property Tax reminder stating they owe the whole years worth of taxes. Frightful right?

Just after moving in to her new home, my client received a notice in regards to the property tax adjustment and as a First Time Home Buyer, we had discussed this could happen so she did not freak out –completely!

If you’re selling or buying a home there’s a great chance, that you’ll incur a Property Tax Adjustment to finish your real estate transaction. A Property Adjustment ensures that you don’t over or under-pay property taxes, and it guarantees that you pay the correct amount of taxes that should be incurred by your purchase date.

Property Taxes are typically levied on an annual basis effective January 1st and become due and payable on June 30th. Using these dates, this means that property taxes are payable six months after they become owing and cover six months into the future when paid on June 30th.

Certain borrowers (usually borrowers who have had to get a mortgage with a B lender, such as Home Trust or Equitable Bank to name a few), will have their property taxes paid by the lender. In this case, the lender may pre-colllect your property taxes six months in advance, which can put a hex on your budget. (Will cover this on a future post)

However, when you are in charge of paying your property taxes yourself, here’s what the calculation looks like.

Property Tax Adjustments are typically calculated as follows:

(# of Days in year to Closing Date)/365

x

Annual Property Tax Levy Amount

=Adjustment Amount

Property tax adjustments are based on two time periods; the sale closes prior to June 30th or it closes after June 30th.

If the sale closes prior to June 30th, the BUYER will receive a credit for the amount of the year’s taxes owing to cover the portion of taxes not yet paid by the Seller. The BUYER is then responsible for paying ALL property taxes for the year by the due date;

Example – Mike is buying a home from Joe. The Sale closes May 1st and annual property taxes are $3,500.

(120 days to Closing Date)/365 x $3,500=$1,150.68

Mike will receive a Property Tax Adjustment credit of $1,150.68 on the purchase and will be responsible for all property taxes for the year.

If the sale closes after June 30th, the SELLER will receive a credit for the portion of the year’s taxes, which are owed by the Buyer, because the Seller, in this case has prepaid the entire year’s property tax. This also means that the buyer requires more money upfront to complete the purchase (adjusted at closing) but will not incur additional property taxes in the year of purchase.

Example – Tim is selling his home to Mike and the sale will close July 14th. Annual property taxes are $3,500.

(194 days to Closing Date)/365 x $3,500=$1,860.27

Tim will receive a Property Tax Adjustment credit of $1,860 on the sale and Mike not be responsible for property taxes for the year.

Keep in mind that in some jurisdictions the municipality provides the option to pay property taxes by way of a monthly Tax Installment Payment Plan or TIPP for short. I live in Newmarket and my municipality allows me to pay over 10 months, which really helps when budgeting. By enrolling in this payment plan, property owners can make smaller monthly payments rather than one large lump-sum payment – a convenient option from a cash-flow perspective.

I can be reached at amina@aminas-ms.ca or 416 697-5443.To Your Wealth! Amina